Environmental and social governance – Navigating between the carrot and the stick

Andrew Rosenbaum is Business Editor of Cyprus Mail and Editor-in-Chief of Cyprus 4.0.

The literature on human motivation is replete with flat academic works – research invariably rhyme with solipsism – informing us that the carrot is better than the stick.

Certainly, the “carrot”, that is to say performance and return on investment, has contributed to the stratospheric rise of environmental and social governance (ESG) by reforming the behavior of companies and determining investment. institutional over the past 10 years.

In 2020 alone, $ 152 billion in new money was invested in ESG-labeled products and total global assets for these products reached over $ 1.6 trillion. Financial Times reports.

Over 2000 studies have shown that “the business case for ESG, the business case for ESG is empirically very well founded.” According to the School of Business at the University of Hamburg, around 90% of studies show a positive relationship between ESG adoption and bottom line.

“Young people are everywhere. A new survey from Montfort Communications, a public relations firm, and Boring Money, a financial news website, takes stock. In a survey of retail investors, some 63% of 18-34 year olds say they would choose a new fund manager based on their ESG approach. This drops to 67% among 35-54 year olds and about a third of those 55 and over. “

It’s a big, powerful carrot.

However, the ‘stick’, which in this case refers to a series of laws and regulations obliging boards of directors to adopt sustainable practices and investments, also had a decisive effect.

There has been a series of European directives, for listed companies, stock market regulations and for financial services companies, both European and national ESG regulations.

“There is a clear and consistent expectation that environmental, social and governance issues, including climate impact, will be included in stewardship and investment decision-making,” Sir Jon Thompson, Managing Director of the UK Financial Reporting Council.

And, in case that isn’t clear enough, Deutsche Bank Managing Director Christian Sewing has warned that lenders “risk losing their operating license” if they do not make green finance a priority, the group having raised its own objectives. “

Companies are finding, however, that their shareholders and investors, including private equity funds that go to unlisted companies, are demanding that their boards take an ESG perspective. This is also part of the “stick” side of this problem.

The challenge for companies that navigate between “carrot and stick” is to identify real prospects for ESG investment.

“We support a common set of global standards for non-financial reporting, in particular environmental, social and governance (ESG) reporting, which unites the wide range of frameworks currently in place and emerging internationally. In our view, it will be important to establish these global standards before determining how information will ultimately be shared with stakeholders. ” warns Julia Wilson, president of the 100 group which brings together the financial directors of the FTSE 100.

Or, as columnist Merryn Somerset Web puts it: “In general, if you buy an ESG-labeled fund, there’s a good chance you’re getting a quality growth fund probably with a tech bias with a lot of marketing presentation. on the ESG. “

This points to the challenge for most Cyrus companies that are fittest in the development stage of an ESG strategy: there is still not a clear and universal set of criteria to distinguish a real ESG investment from what is an ESG investment. ‘we call “greenwashing”.

But Cypriot businesses are already meeting these challenges, as our report shows.

In Cyprus, moreover, there is considerable development in the area of ​​corporate social responsibility (CSR). This type of sustainable action preceded the ESG and is now part of it.

CSR is marketable because it allows even very small businesses to do good while reaping a well-deserved bonus in public relations.

As a result, CSR is widespread in Cyprus and our report shows how much it can be developed. Companies with CSR programs have done a lot of good on our island during the pandemic, so you have to understand that CSR is real and meaningful.

Making sense of ESG is an ongoing process. The most immediate effect is to keep investment funds away from “sinful” businesses – fossil fuels, guns, etc. – whatever the return they provide. The next step will be to actively support lasting causes, and this transition is proving difficult, but not insurmountable.

It’s all part of stakeholder capitalism, and it seems to be the theme of business in the 21st century. Perhaps, after the sad results of the 20e century we’re actually going somewhere?

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